Friday, August 29, 2014

A zillionaire for raising the minimum wage

The radio program On Point, hosted by Tom Ashbrook discussed income inequality with Nick Hanauer. I heard a bit of the program Tuesday evening before arriving home to a house without power. Hanauer was an initial investor of Amazon, has founded or funded over 30 companies, and now is one of the super-rich. He has the plane, yacht, and multiple fancy homes. His message is that if the 1% don't work to re-balance the wealth in the economy the whole thing will come crashing down. Alas, there is no transcript of the show, so I summarized while listening on the web. The audio is 47 minutes.

Capitalism is the greatest engine for creating wealth, but it can benefit everyone or it can benefit the few. It is the role of democracy to make sure it benefits everyone. The problem isn't inequality. The problem is high levels of inequality. And we're at record high levels now and the spread is widening. Such levels lead to pitchforks in the streets and damage to democracy.

The upheavals in Ferguson, MO over the shooting death of Michael Brown are an example of the disenfranchised beginning to fight back.

It doesn't make sense for the rich to push for policies that extend and accentuate the inequality gap. First reason: Throughout human history when the inequality got this severe, the pitchforks have always come out – unless there is a police state in place. But a lot of Americans think we're a peaceful society. We don't do that stuff here. True statement?

A correction to what capitalism is: It isn't an efficient allocation of resources. It is creating new solutions to human problems.

Of course, fellow super-rich consider Hanauer to be bonkers. They buy into the "trickle-down" idea that the more money the job creators have, the more jobs they create and the better off everyone is. But it isn't true. Jobs are part of a feedback loop between customers and businesses. When workers have more money, businesses have more customers and need more workers.

Those at the top would rather believe the efficient market hypothesis because if markets are efficient then those at the top deserve to be rich and others deserve to be poor. But markets aren't efficient, they're effective – if well managed.

Hanauer notes that five years ago income inequality was a taboo subject in polite society. But now many of the rich agree that inequality is an issue that needs discussion. But what to do is still an open debate with many of the rich hesitant about the tradeoffs they would need to make. Even so, they recognize the central point (and the second reason to close the inequality gap): When their customers have no money the businesses owned by the rich have no customers.

Reason three: High levels of inequality stretch the society apart. The rich become disconnected from the rest, which reduces empathy and increases contempt (by the rich for the poor and by the poor for the rich), a dangerous and corrosive mix. The poor no longer have a stake in the society. The situation can get wildly out of control very quickly (a tipping point). Alas, if the rich feel aggrieved one thing they are very good at is contacting their senator.

Complaining about the rich and ranting about what the bankers are doing is not a theory of growth. This is: The more people, entrepreneurs and customers, who are included in prosperity the more innovative the economy becomes and the more it grows. The more participants in the economy the more it grows. This is reason four.

Thirty years ago the American middle class was the largest and richest in the world. That's no longer true. Canada is no longer the poor cousin. Their cities are much more vibrant than American cities. A measure of an economy should be how much better the middle class is doing than in other countries.

Today's politicians don't make decisions based on sound economic policy, they make decisions based on rules-of-thumb, which were taught as good economics maybe 50 years ago but are now being shown to be false. One of those is tax cuts to the rich benefit the entire economy. Another is the rich are job creators, the more money they have the more jobs they create. The people at the top matter, the people at the bottom do not. Trickle-down economics works. The bigger the big get the better off everyone is. When you raise the price of employment, you get less of it. The GOP budget encapsulates those rules. Some of these rules are used because of confusion, some because rich people know who will be advantaged by using them.

Seattle raised the minimum wage to $15 an hour. It raised the wages of tipped workers to somewhere around $9 an hour – the federal minimum for tipped workers is around $2. So why is the restaurant scene in Seattle booming? Because even tipped workers can now afford to eat in restaurants. The poor getting richer is not bad for the economy.

We as a country can choose policies that spread prosperity. Raising minimum wage, especially of tipped workers, is one such policy. Another is to help the small business compete against the big. Also, balance the power between owners and workers.

Our policies used to help people become rich. They now reward people for being rich.

We've already outsourced all the jobs that can be. The job of hotel maid can't be outsourced. But why should that job be a low-paying job? Walmart made $27 billion in profit last year. Why can't it use $10 billion of that to pay each of its million workers another $10,000 a year, which would get them off food stamps – and give them enough money to buy more products from Walmart? Why shouldn't the service job of today match the manufacturing job of 50 years ago that provided a middle-class income? The big reason why it doesn't is power. Manufacturing workers had unions.

Will the rich see this understanding and change their ways? Maybe not. But another goal of Hanauer's message is to wake up the other 99.8% of us, remind us we're the source of growth and prosperity, and get us to demand policies that spread prosperity.

Hanauer was invited to be on the show because he had written an article for Politico making the same points he made on the air. It is easier and more complete to read that rather than listen to the show.

A quote from the article:

In any large group, some people absolutely will not do the right thing. That’s why our economy can only be safe and effective if it is governed by the same kinds of rules as, say, the transportation system, with its speed limits and stop signs.

And some more ideas:

Want to reduce the size of government? Reduce the need for government. Pay workers well and they don't need food stamps or rent assistance or medical care.

Democrats say raising the minimum wage is a justice issue, all about fairness. And that's why they lose the argument. Republicans campaign on growth, but they provide the wrong solution. Minimum wage is a growth issue.

There can never be enough super-rich Americans to power the economy. Paying a CEO 1000 times more than the average worker does not benefit the economy. That CEO does not buy 1000 shirts for every shirt the average worker buys. Instead, that CEO puts the cost of 998 shirts into savings.

A problem with the Occupy movement is their message that capitalism is bad. What is bad is mismanaged capitalism, which concentrates wealth. Smart capitalists will make sure capitalism is sustainable, and that means spreading prosperity.

Tim Worstall is a contributor to Forbes and thinks Hanauer's ideas are insane. Some of his rebuttals:

A central story by Hanauer is that when Henry Ford raised wages to $5 a day he boosted sales of his cars. But Ford had 14,000 employees, which wouldn't put a big change in annual sales of 200,000. The raise cost Ford $9 million a year. If all employees bought a car that would increase sales by $7.75 million. That doesn't increase profits. The reason why Ford went to $5 a day was to reduce turnover so he didn't have to hire 50,000 a year to fill 14,000 jobs.

Worstall considers the price of labor and says, "People who employ more expensive labor use it more sparingly." Raising the minimum wage changes the way companies use their workers – though it seems Worstall doesn't factor in the number of workers may need to stay the same or grow to handle increased customers.

Worstall says Hanauer dismisses the effect of savings – it was savings that allowed Hanauer to invest in Amazon. So Hanauer should use his money to fund more companies rather than tell companies to raise wages. Even I see a disconnect here, and my last economics class was a long time ago. Hanauer won't invest in a company (which would create jobs) unless he knows that company is likely to make money. And for that it needs customers, which would come from a healthy middle class.

I note that Worstall doesn't refute one of Hanauer's central themes – when their customers have no money the businesses owned by the rich have no customers.